It’s an exciting time for the Private Commercial Lending industry. 2012 trends are showing growth for commercial investments and many regional and local banks have started lending again for commercial projects. The demand for private money is still very high as the banks and mortgage companies are still avoiding construction and land development. Also the recent years’ lack of funding for notes coming due and distressed properties has left the door open for Hard Money Lenders and Equity Lenders.
You are probably wondering what the title of this article has to do with the business of Private Lending for Commercial Real Estate. I was listening to the Tom Petty song and thought about the important attributes of commercial real estate brokers. In our business, success comes from being patient and understanding the timing of the process.
If you are looking for a business loan, commercial real estate loan, or looking to raise equity for a commercial project, you are likely going to work with a commercial loan broker to raise the capital. This article addresses the quandary known as the broker chain. If a broker chain is formed to find a source for funding a project, the process is likely to be impeded by weak links in the chain.
What is a Broker Chain
Commercial lending, for the most part is based on the value and performance of the commercial assets used as collateral. Because of the focus on the asset performance, many borrowers expect commercial loans to be non-recourse.
Most borrowers are optimistic investors leaving much to chance. Most private lenders are bullish and use mathematical models to provide risk assessment. Loan originators are jammed up in the middle.
Have you applied for a commercial loan lately? Most banks are not doing commercial loans and others just wait forever to give you an answer. They don’t want to lose you as a customer and they really don’t want to fund your project.
Commercial loan brokers are aware of the painfully long process of closing a loan for commercial real estate. The process will take several months to complete. It can be even longer for construction loans or business loans that are not tied to commercial assets. For example, HUD loans can take 18 months to fund. Recently, a borrower in Honolulu came to me to refinance an operating assisted living facility. He has been working with a local bank to refinance for 6 months and still does not have an answer.
One of my favorite movies is Easy Money with Rodney Dangerfield and Joe Pesci.
Rodney’s character made a deal to give up all of his vices to inherit his mother-in-law’s fortune. It turned out to be harder than he imagined.
There is nothing “easy” about obtaining a Hard Money loan from a private lender. It is a proposition based on risk. The lender assumes the risk of repayment of a highly leveraged loan, the borrower assumes risk of paying up-front fees to someone who will not perform, and the brokers assume the risk of getting squeezed out of the deal. Hard money fees can be as high as 10 points with interest rates above 12% and upwards of 20%.